In 1995, Warren Buffett’s partner, Charlie Munger, delivered a speech at Harvard. The title was “The Psychology of Human Misjudgment.” In his talk, he described twenty-four factors that cause human beings to make errors in judgment.
By way of introduction, Munger noted, “How could economics not be behavioral? If it isn’t behavioral, what the hell is it?” This was at a time, in 1995, when economics was still viewed as a mostly scientific discipline. But Munger was ahead of his time. Since then, there has been an increasing understanding that economics is as much behavioral as it is scientific. And the same applies, I think, to finance. It too is partly scientific and partly behavioral.
Munger's line still lands because most of his 24 tendencies aren't isolated errors, they compound. Social proof plus incentive-caused bias plus commitment consistency is basically the anatomy of every bubble. The hard part for investors isn't knowing the list, it's noticing in real time when three of them are pointing the same direction at once.